Putting your kids’ piggybank savings in banks not enough; take the next step, invest in mutual funds

DEMONETISATION has impacted even children’s piggy banks as the R500 and R1000 notes in them had to be deposited in the bank. That money, deposited in the bank account, should be invested later, preferably in the name of the child, for higher returns.

Make the investment in your child’s name as it gives focus to your investment and greater clarity on the goals, time horizon and the type of returns.

DEMONETISATION has impacted even children’s piggy banks as the R500 and R1000 notes in them had to be deposited in the bank. That money, deposited in the bank account, should be invested later, preferably in the name of the child, for higher returns.

As savings bank account pay 4% interest per annum (though a few private sector banks offer 6%) parents can look at mutual funds to invest their children’s piggy bank treasure and make the power of compounding work for a longer period. This will help build a corpus, which can be used for higher education. One can also invest in Public Provident Fund (PPF) for the child as an additional PPF account for a minor child is allowed. However, it will be clubbed under the overall limit of the parent at R1.5 lakh a year.

Make the investment in your child’s name as it gives focus to your investment and greater clarity on the goals, time horizon and the type of returns.

Invest in child’s name

Every asset management company (AMC) allows an individual to invest in any scheme in the name of the child, even if he is a minor. As per the rules of mutual funds, the minor child will be the first and the sole holder in an folio and no joint holder will be allowed in a folio with the minor child. Also, the guardian in the mutual fund folio will be either the father or the mother or a court appointed legal guardian. The relationship of the guardian—natural or legal—with the minor will have to be mandatorily provided while opening the mutual fund folio.

Parents will have to give copy of birth certificate or copy of passport as evidence of date of birth of the minor. After the documents are submitted and the folio is created, AMCs register standing instructions like Systematic Investment Plan (SIP) or Systematic Transfer Plan (STP) in the folio held by a minor. The standing instruction will be valid only till the date on which the minor turns major. Fresh instructions will have to be given to the AMC once the child turns major.

KYC requirement

All the know-your-customer (KYC) norms like Permanent Account Number (PAN), bank account details and address proof will have to be given of the parents or the guardian.

Since the parents will issue the cheques and make the payments, any interest or dividend received from the investment will be credited to the parent’s bank account. The ownership of the investments, however, will be with the minor investor.

Also, in case of a change in the guardian of the minor, the new guardian will have to submit documents like No Objection Certificate (NoC) or consent letter from the existing guardian or a court order for new guardian, in case the existing guardian is alive. The KYC documents of the new guardian will also have to be provided to the AMC.

From minor to major

On turning 18 when the minor becomes a major, the AMC will suspend all transactions and standing instructions and folio operations will be frozen. An application form along with prescribed documents to change the status of the folio from minor to major will have to be done and after this, the child can do all the transactions by himself.

The child now turned adult will have to submit his KYC documents. His signature, attested by the bank manager, will replace that of the parent’s or guardian’s in the records, and his bank account details will have to be provided for all future credits and debits.

So, an investment in a mutual fund made in the name of a minor cannot be operated by the guardian once the minor becomes a major.